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2010 (11) TMI 137 - AT - Income TaxAddition of income - capital gain on transfer of the properties by the firm to one of its partners on dissolution of the firm - dissolution of the firm by law - Assessing Officer made an addition of Rs. 62,13,027 to the total income of the assessee on account of difference between FMV and book value of assets - Held that the assessee took over the project which the firm was constructing in his individual capacity. Therefore there was a transfer of capital asset of the firm viz., work-in-progress of the project which the firm was carrying on. - The CIT(A) in our view misdirected himself by applying the ratio of the Hon ble Supreme Court in the case of Sakthi Trading Co. (2001 -TMI - 6026 - SUPREME Court), which decision is not applicable to the facts of the present case at all - there was a transfer of a capital asset on dissolution of the firm by the firm to one of its partners and therefore the capital gain to the firm on such transfer has to be brought to tax. Labour charges - In the year in the project is completed, it may not be possible for the Assessing Officer to embark upon an enquiry as to whether labour charges incurred for an earlier assessment year which has already been considered as part of WIP, is genuine or not -CIT(A) ought to have rendered a finding as to whether the labour charges claimed by the assessee were true, genuine or not. - Matter remanded back.
Issues Involved:
1. Deletion of addition made by the Assessing Officer regarding the difference between the estimated fair market value and book value of the stock in trade and other assets of the firm upon dissolution. 2. Deletion of disallowances pertaining to labour charges. Issue-Wise Detailed Analysis: 1. Deletion of Addition Regarding Fair Market Value and Book Value: The revenue appealed against the CIT(A)'s order which deleted the addition of Rs. 62,13,027 made by the Assessing Officer (AO). The AO had added this amount to the assessee's income, considering it as the difference between the fair market value (FMV) and the book value of the firm's stock in trade and other assets upon the firm's dissolution. The firm, initially constituted by two partners, dissolved upon the death of one partner and the retirement of the deceased partner's legal heirs. The surviving partner continued the business as a sole proprietor. The AO argued that the firm's dissolution and subsequent transfer of assets to the surviving partner amounted to a transfer under the Income-tax Act, 1961, thus attracting capital gains tax. The AO treated the difference between the FMV and the book value of the work-in-progress as business profits of the firm. The CIT(A) deleted the addition, citing the Supreme Court's decision in *Sakthi Trading Co. v. CIT [2001] 250 ITR 871*, which held that in the absence of business discontinuation, the closing stock should be valued at cost or market price, whichever is lower. The CIT(A) noted that the business continued without any disturbance, and thus, revaluation of stock at market price was not justified. Upon appeal, the Tribunal observed that the AO should have assessed the difference under the head 'capital gain' rather than 'business income.' The Tribunal referred to section 45(4) of the Income-tax Act, 1961, which states that the profits arising from the transfer of a capital asset by way of distribution on the dissolution of a firm are chargeable to tax. The Tribunal noted that the firm was dissolved, and the assets were transferred to the surviving partner, constituting a transfer of capital assets. The Tribunal reversed the CIT(A)'s order, holding that the capital gain should be computed based on the FMV of the assets on the date of dissolution. The matter was remanded to the AO for fresh computation of capital gains. 2. Deletion of Disallowances Pertaining to Labour Charges: The AO disallowed Rs. 9,55,879 claimed by the assessee as labour charges, as the notices issued to verify the genuineness of the transactions were returned unserved. The CIT(A) deleted the disallowance, reasoning that since the project was not completed during the year and the costs formed part of the work-in-progress (WIP), no addition was warranted. The CIT(A) suggested that the genuineness of the expenses should be verified in the year the project is completed. The Tribunal, however, held that the CIT(A) should have rendered a finding on the genuineness of the labour charges. The Tribunal noted that it might not be feasible for the AO to verify the genuineness of expenses in the year the project is completed. Thus, the Tribunal set aside the CIT(A)'s order and remanded the issue back to the CIT(A) for fresh consideration to determine the genuineness of the labour charges. Conclusion: The appeal by the revenue was partly allowed. The Tribunal reversed the CIT(A)'s order regarding the addition of Rs. 62,13,027 and remanded the matter to the AO for fresh computation of capital gains. The issue of disallowance of labour charges was also remanded to the CIT(A) for fresh consideration.
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